Blog

The state of carbon pricing: Around the world in 46 carbon markets

29 May 2014, 16:20

Mat Hope

Sarah Ackerman

Carbon markets, designed to make polluters pay
and reduce emissions, are more common than ever. But the economic
slump and the structural flaws mean they're stumbling, a new report
suggests. We take a whistlestop tour of the schemes.

As eight new markets opened in 2013, and both the US and China
established programmes, there was some hope that carbon pricing was
coming of age. But only 12 per cent of the world's emissions are
covered by the projects. And the last 12 months have been tough for
some flagship schemes.

Some European countries have a carbon tax where the government
sets a price for each tonne of carbon dioxide emitted. Others have
cap-and-trade systems where the governing body sets a gradually
reducing limit on emissions covered by the scheme, and let the
market set the price.

The European Commission scrambled to boost the price after it plummeted
to record lows in 2013. Its plan to temporarily remove 900
million permits - known as
backloading - is only a temporary fix, however.

The commission has introduced a new proposal that would allow it
to tinker with the number of permits, known as a strategic reserve.
But experts remain
unconvinced the reform would be able to save the market.

A number of domestic schemes have popped up to bolster the
EU-ETS.

The UK introduced a
carbon price floor in 2012 which put a minimum price on
emissions. But the media blamed it and other green levies for high
consumer bills, leading the UK Chancellor to
curb the policy.

Sweden also has its own
carbon tax. With a price of $168 per tonne of carbon dioxide,
it has the highest carbon price in the world. A number of
industries - such as those not covered by the EU ETS and
agriculture - are partially exempt from the tax, however, limiting
its effect.

France and Ireland also have limited taxes on the use of fossil
fuels.

US

America's Congress has failed on numerous occasions to establish
a nationwide cap-and-trade programme. But it does have two regional
schemes.

While symbolically important, the RGGI isn't particularly
ambitious - the carbon price is consistently between $2 to $3.
California's market has fared slightly better, with a carbon price
of around $10 to $15 during its first full year of trading. Both
schemes show a desire for climate action in the US at the
sub-national level which the national government has so far
struggled to match.

President Obama is expected to make an announcement on Monday
which could strengthen the schemes, however. A new rule capping
coal emissions could encourage states to join existing
cap-and-trade schemes or set up their own.

China

Perhaps the biggest news in the carbon trading world this year
was the start of six regional cap-and-trade schemes in China. 1,115
megatonnes of carbon dioxide emissions are covered by the schemes,
making China the second largest carbon market in the world.

Each of the schemes is slightly different, with the carbon price
fluctuating between ¥20 ($3) and ¥80 ($13). China's national
government is hoping to learn which works best before rolling out a
nationwide programme, possibly as early as 2016, the World Bank
reports.

Australia

In contrast to China's exciting early success, a change of
government has seen Australia's carbon market implode.

Tony Abbott was elected as Australia's prime minister in 2013 on
a
largely climate skeptic platform. A centrepiece of his Liberal
Party's environmental policy is to scrap Australia's carbon tax and
stop its planned integration into the EU ETS. Instead, the
government wants to implement a 'Direct Action Plan' in which
companies 'bid' to reduce emissions.

The proposal switches the emphasis of Australia's emissions
reduction policies to paying businesses to curb emissions, rather
than taxing their pollution. Experts
remain unconvinced by the plans economic or environmental
credentials, however.

Pricing problems

All in all, it's been a mixed 12 months for global carbon
markets. For every Chinese success, there's been an
Australian-style failure. And for every new market, a flagship
scheme has faltered.

While many politicians and policy analysts continue to see
carbon pricing as a core part of global efforts to reduce
emissions, existing markets have structural frailties. These
problems often keep prices low and limit their ability to reduce
emissions.

Part of the problem was that
when the global economy crashed, energy demand plummeted. That
led to a surplus of permits in carbon trading schemes, pushing
prices down and letting many polluters off the hook. This led to a
belated recognition that governing bodies needed some sort of
control over the amount of permits in trading schemes - and
therefore the carbon price - if they are going to be effective.
Hence the EU ETS reforms.

And unless a global carbon market is established, there's always
a danger polluters will just move from a region with a high carbon
price, to a market with a lower price, or no price at all. A
problem known as
carbon leakage.

The World Bank says a strong international treaty in
2015 would help revive interest in a global carbon market. As
negotiators work hard to try and make that happen, existing schemes
will continue to bear the carbon pricing load with variable levels
of success.